Hospitality Consulting Services
400 Spear Street, Suite 106
San Francisco, CA 94105
|by Rick Swig, February 2003
Let’s face it, the last two years have been pretty tough going in the hotel sector. 2003 will not be the big rebound year that everyone hoped that it would be. Definitions of real estate values are possibly further disconnected between buyers and sellers. Travel and buying patterns have changed. Economics, politics, and security are key indicators of travel segment health and welfare, while electronic distribution channels are changing business and consumer behaviors. It’s not the way it used to be. It never will be again, so implementing new practices and paradigms are critical to success…and, yes, maybe a few fundamentals can still be maintained.
Hotel real estate transaction activity will not pick up again until sellers recognize that they might just have to wait until the next millennium for another year like 2000. There is willingness for investment in the hotel sector. Buyers, however, are recognizing that the trends for 2003 look similar to 2002, which from a REVPAR standpoint, show remarkable revenue likenesses to 1997 or 1998 in at least most of the top thirty markets. The similarity stops there, however, as, unfortunately, the cost of product and service delivery has grown. Increases in hourly wages, employee benefits, and insurance have gone north, while those revenues have gone south.
The vision of a short-term hotel asset hold with a high value gain is probably a myopic fantasy for the near future. Anticipated upswings in quarterly earnings may revert to the goal of just maintaining the status quo. There may be no tonic to provide the overnight gratification of a cure.
After two historical years of poor performance with another similar period in the forecast, buyers now recognize that 2001 was not an aberration, but the beginning of an ongoing trend with no quick bounce back in sight. Although sellers may point out replacement cost thresholds, buyers will retrench to net operating income points of view. Cap rate sales will not be attractive to sellers, but with interest rates bottomed out and reserves exhausted, some owners may be forced to exercise their right of capital redeployment and right out of hotel ownership.
Although problematic in many ways, this current business cycle has proven that hotel operators are far more sophisticated with better strategies and tactics to maximize revenue and control expenses through improved organizational structures and technology. Lenders have not allowed risky loan to value ratios, while showing regulated diligence in their funding of debt. As Randy Smith has pointed out in countless presentations, hotel managers have really learned how to make more profit by comparison to both historic good and bad times alike. While the hotel sector is better than ever at managing its business, it must also recognize that relying on traditional standards and practices may provide self-perpetuating limitations.
The basic fundamentals of travel and traveler habits have changed, while the hotel business has not fully learned how to manage these new dynamics. As a result, many reactions to new situations are only fruitless knee jerk reactions utilizing obsolete response tactics.
When travel slowed due to any combination of economic downturn, fear, and hassle, the hotel industry did not stop, analyze, strategize, and implement. Instead there was instant panic to discount because that was the traditional balm that had seemed to cure previous wounds. Few stopped to review individual market segment behavior and to recognize, for example, that corporate business travel was not going to be stimulated by discounting. There was little recognition that corporate travel of any kind was being curtailed by restrictive budgets and cost cutting policies, which did not regard discounted hotel rooms as the reason to travel. This misjudgment just might result in depressing average daily rate levels in most major markets for the next half decade.
New electronic distribution channels present the finest opportunity for hotels to conveniently merchandise their products to masses of consumers inexpensively and efficiently. Via internet channels the new hotel brochures have become animated libraries through which consumers are able to view hotels like never before. Consumers can instantly request and purchase products in a one stop shopping format. Convenience, information flow, and instant gratification are benefits to any consumer in their purchase decision.
Hotel operators unfortunately have utilized internet channels differently, however. Without careful strategy development or an effort to understand the inherent information and convenience value of this tool to customers, the hotel industry rushed to turn internet channels into instant dumping grounds for distressed merchandise. This tactic set the precedent for the future. Consumers have been trained to perceive that internet channel value is based on discount pricing rather than convenient access or information. The hotel sector’s reaction was based on old thinking and old paradigms rather than forward thinking vision of a new age of consumerism.
Strategic usage of electronic channels is only one example of reviews that hotel owners and operators must consider during the resurrection process to the new hotel business. Guest comfort, security, entertainment, and service will always be the primary staples of hospitality, but there are evolving issues, including, among other, merchandising and distribution of product through new channels, recruiting and training of human resources, and efficiently managing facilities, must be reviewed in consideration of evolving consumer habits, general human response to stimuli, and/or usage of technology.
Asset value will ultimately return with new economic prosperity, political stabilization, and consumer confidence. This may take several years with certain ebbs and flows of transactions, mergers, and/or other shifts in hotel ownership structures. The successful survivors in the hotel sector will be those participants who are now willing to consciously, strategically, and systematically consider new models of behavior without recycling traditional tactics, which maybe comfortably familiar yet now obsolete due to new behaviors.
RSBA & Associates
400 Spear Street, Suite 106
San Francisco, CA 94105
Tel: (415) 541-7722
Fax: (415) 541-5333